Front end fees paid to bank for new loan is revenue in nature, can be amortized – High Court

Front end fees paid to bank for obtaining new loan is revenue expenditure by nature and the assessee is entitled to amortize it – High Court

ABCAUS Case Law Citation:
ABCAUS 2889 (2019) (04) HC

Important Case Laws Cited/relied upon by the parties
Madras Industrial Investment Corporation Ltd. Vs. Commissioner of Income Tax 225 ITR 802

The instant appeal was filed by the Revenue challenging the order passed by the Tribunal in deleting the addition made on account of front end fees to bank.

The respondent assessee company, while obtaining a new loan, had to pay a fee to the bank or financial institution described as “front end fees.”

The assessee had claimed amortization of the said expense under Section 35D of the Income Tax Act, 1961 (the Act). According to the department, this expenditure could be claimed once and could not be spread over a period of ten years under Section 35D. This expense, according to Revenue was not one which would fall within the conditions stipulated in Section 35D(1) and (2) of the Act.

The assessee relied upon the definition of the “interest” as provided in section 2(28A) and argued that the front end fees paid by the assessee could be equated with “any service fee or other charge” provided in that sub-section and constitute a part of interest payment made by the assessee.

Therefore, it was submitted that if this loan was of a particular duration and interest was paid at intervals, this front end fee should be added to the interest amount and would be a part of interest. Therefore, the interest amount including the “front end fees” is to be treated as an expenditure and could be amortized under Section 35D. The assessee, in this regard also relied upon the decision of the Hon’ble Supreme Court.

The Hon’ble High Court observed that the facts of this case were very similar to those before the Supreme Court. Here the assessee was required to pay front end fee to obtain loan from a bank or financial institution. It also had to pay interest.

The Hon’ble High Court opined that the front end fee is part of interest under Section 2(28A) of the Act. The interest payment was spread over the duration of the loan. Therefore, the front ends fee constituted interest liability of the assessee spread over a period of time. Obtaining the loan and paying interest to service it ensured long term benefit to the assessee. Hence, this expenditure was revenue and not capital. Furthermore, according to the said decision, the assessee was entitled to amortize it.

The Hon’ble High Court opined that the Tribunal was required to re-determine the issue by considering decision of the Hon’ble Supreme Court and determine the allowable revenue, expenses of the assessee for the relevant assessment year.

Accordingly, the impugned order of the tribunal was set aside with regard to the issue concerning front end fee to make a fresh determination.

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